Safe Bets in Troubled Times
Stocks may continue to tumble because of the credit crunch. But investors should continue to hold large-company stocks with little debt and strong overseas sales.
After a week of hyperventilating, take a deep breath. Despite the year's second-worst day of trading on August 9, the Dow Jones industrials, Standard & Poor's 500-stock index and the Nasdaq all ended the week slightly higher than where they began. The volatility may point to a correction, but the bears won't feast for long.
Hedge funds sparked the most recent bout of volatility. Jittery investors made a run on these funds, which prompted fund managers to sell highly leveraged assets to generate cash to pay redemptions. Such transactions rippled through the capital markets. That caused central banks worldwide to inject billions into the markets to keep them liquid. But because hedge funds are loosely regulated investment pools, no one has a clear idea of how exposed these funds are to subprime mortgages.
These hedge funds operate in darkness, so their unknown holdings and practices mask the extent of the supposed credit crunch. Many of these opaque funds own packaged investments whose value is affected by their exposure to subprime mortgages. Rising loan delinquencies and home foreclosures cause declines in the values of these securities, which force some of the worst-positioned hedge funds to sell higher-quality investments to remain solvent.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
There's no way to know how much and what lands on the sell desks. "The potential for hedge funds selling to meet redemptions is the biggest unknown in the markets," says Tobias Levkovich, Citigroup's normally bullish economist. He suspects that there will be more churning of stock portfolios and fear that it will continue to harm stock prices. The last week of July was in fact the second-worst in four years for hedge funds worldwide, with a loss of 3%, according to the Hedge Fund Research index.
Another question is whether there is enough money around for banks and other lenders to make good on previous commitments, such as already-announced mergers and takeovers. Central banks appear aware that credit is tight and appear to have a handle on it for now. "Ben Bernanke is very likely on top of the situation, and we think that the only question is timing in terms of the real rate relief that is surely coming down the pike," says David Rosenberg, Merrill Lynch economist.
However, the decline of the U.S. housing market and resultant credit crunch pose real threats to parts of the economy, especially some financial firms. But global growth will trump these problems over the next several months. That's why shares of U.S. companies with strong overseas exposure still make sense.
One that fits the bill is General Electric (symbol GE, $38.23). Demand from rapidly developing countries, such as China and India, for more roads, electricity and water will fuel the company's growth in infrastructure development, energy equipment and heavy construction.
Companies with dependable streams of revenue also make sense when there are questions about credit. Comcast (CMCSA, $25.44) has increased its sales by bundling its phone, cable and Internet services while offering more premium options.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
-
The Surprising Truth About Loneliness and Longevity
We've all heard about the epidemic of loneliness that can shorten lives and make retirement miserable. But there's more to the story.
-
The Dollar Index Is Sliding. Is Your Portfolio Prepared?
The Dollar Index Is Sliding. Is Your Portfolio Prepared? The dollar's fall has been troubling because inflation appears to be constrained and the economy has been strong. Here's what it means for investors.
-
If You'd Put $1,000 Into Berkshire Hathaway Stock 20 Years Ago, Here's What You'd Have Today
Berkshire Hathaway is a long-time market beater, but the easy money in BRK.B has already been made.
-
If You'd Put $1,000 Into Procter & Gamble Stock 20 Years Ago, Here's What You'd Have Today
Procter & Gamble stock is a dependable dividend grower, but a disappointing long-term holding.
-
The Best Aerospace and Defense ETFs to Buy
The best aerospace and defense ETFs can help investors capitalize on higher government defense spending or hedge against the potential of a large-scale conflict.
-
AI vs the Stock Market: How Did Alphabet, Nike and Industrial Stocks Perform in June?
AI is a new tool to help investors analyze data, but can it beat the stock market? Here's how a chatbot's stock picks fared in June.
-
Stock Market Today: Stocks Rise on Less Deadly Concerns
Markets are forward-looking mechanisms, and it's good when price action shows there's a future to look forward to.
-
My Three-Day Rule for Investing: And If it Applies Now
Stock Market I've seen a lot in my career. Here's what I see now in the stock market.
-
Is It Time to Invest in Europe?
Stock Market Europe is being shaken out of its lethargy, militarily and otherwise, by Donald Trump's changes in U.S. policy. Should investors start buying?
-
Stock Market Today: Stocks Soar on China Trade Talk Hopes
Treasury Secretary Bessent said current U.S.-China trade relations are unsustainable and signaled hopes for negotiations.